Game Theory

This is part 1 of a 5 part series on Game Theory.

Last week we covered Decision Theory, a set of tools for making decisions using data. Many decisions are not as simple as making a choice, often you are in a situation where your decisions affect others and their decisions affect you. In these circumstances Decision Theory can break down since the uncertainty makes any predicted values hard to estimate.

What can we do? We can play some games!

Game Theory is the study of situations where there is more than one player. Say, for example, you are thinking of lowering the price of your product. Will your competition lower their prices as well? Will your customers choose to buy more? Such a simple decision actually has many players who will make subsequent decisions and in doing so affect you in return. Game theory provides a set of tools and techniques to deal with that complexity and make it easier to build a winning strategy.

The idea that games can be used to model real world scenarios has been around for centuries, but it wasn’t until 1928 when John Von Neumann published a paper on using mathematics to analyze parlor games that Game Theory was born. Today, Game Theory is used to model everything from economics to negotiations because of how well it can help us understand situations where people make many interacting decisions.

We will cover the basics of Game Theory this week with a focus on specific use in answer business strategy questions.

Tomorrow we will get started by seeing how we can take a real life business decision, model it as a game for analysis and build a winning strategy!